More on stock market valuation
My good friend Stefan Karlsson has a great post on current stock market valuations, where he cites my recent post on Stock market corrections. From an earning perspective, Stefan refers to the historical high levels of earnings relative to stock market prices, that we see today.
Take a look at this chart, which show the same chart as in Gregory Mankiw’s original post: the 10 year P/E moving average, together with the Dow Jones Industrial Average, over the last 100 years!
This chart can also be seen in Fari Hamzei’s book: Master Traders, and found on Tuttle Asset Management LLC website.
We see that over the last 100 years, the Dow Jones Index has experienced 3 major consolidation periods, with each lasted on average about 16 years. Historically, the length of the these periods have been in direct relationship to the length of the preceding bull markets. Before each consolidation period ended, the 10 year P/E ratio had fallen below 10. Not until the 10 year P/E once agian reached higher levels, above 10, would a new bull market begin.
The latest bull market lasted more than 17 years, from Oct. 1982 to Jan. 2000. Currently, the 10 P/E has been decreasing for 5 years, ever since the dot-com crash. With current levels above 25, it should be safe to say that the stock market, also from a fundamental perspective, is over valued. Do the math!
